A step-by-step guide to who does what in crypto
The crypto industry is a big machine with a legion of essential service providers that keep the wheels turning and the machine moving forward. The miners mint coins, the crypto exchanges and platforms provide marketplaces and wallets, while investment funds look for profits by investing their clients’ coins. And these are the obvious ones. There are many other little cogs churning in the background.
Sure, it’s a lot to take in, but it is vital that every crypto investor knows exactly who does what to better understand who’s in charge of their coins, and, more importantly, what they are doing with them.
Below we line up the main players in cryptocurrency and see how they’re involved.
Before we look at the service providers, below are the various needs these companies fill in crypto
- Mining – we need miners, without which there would be no cryptocurrency
- Storage – people and institutions need a safe place to store their crypto. This is where a crypto platform like Luno comes in
- Payments – it’s one thing sending Bitcoin directly to your buddy but it’s quite another when shops and other retailers want to transact with crypto. Crypto companies like Square and Stripe build technologies that make this possible
- Investment – institutional investors – certain banks, asset managers, and lenders that invest in crypto on behalf of clients
- Trading – traders and investors buy and sell their crypto assets on digital exchanges
- Research – Consulting companies provide detailed analysis about all of the above
Ok, so we’ve got a good idea of what we need in crypto, now let’s look at who’s servicing these needs.
Most assets require trade of some sort, seeing that trade is carried by supply and demand, which ultimately decides the price of the asset being traded. Anything that holds value must be tradable, and the more buyers there are, the higher the price of the asset; the more sellers, the lower the price.
Crypto exchanges are digital marketplaces where coins can be traded during all hours of the day. Some companies offer centralised exchanges but investors can also trade on decentralised exchanges, which, when it comes down to it, is an app that facilitates direct trading between the parties. It all depends on the type of trade and the type of investor.
Trading does come with a disclaimer, though. It’s a complicated game best left to the professionals, who have insights into how and why markets behave the way they do. Even armed with this knowledge, many traders still get burned. It’s why virtually all investors new to crypto choose to buy their Bitcoin and store it in a wallet with a trusted wallet provider.
You can store your coins in a hard wallet or a custodial wallet provided by a company. It’s something like a bank account for your crypto. The majority of crypto investors opt for the latter, as storing crypto in a hardware wallet comes with the very real risk of losing your keys, the password that opens the lock to your cryptocurrency. Lose this password or key phrase and it’s bye-bye crypto, forever.
There’s an important distinction between a wallet provider such as Luno and an investment firm, which invests client money in other projects with the expectation of making a return.
If you buy Bitcoin and keep your coins in a Luno wallet, we have no intention of using it to generate returns. The price of Bitcoin is wholly dependent on supply and demand, which is how many people want to buy Bitcoin versus how many want to sell it. No one has any influence over the value of your Bitcoin and other cryptocurrencies but the market.
Ten years ago, a computer and an internet connection was all the computing power you needed to mine Bitcoin, but competition in the market and an increase in the difficulty of crypto mining has shifted operations to a handful of companies. These miners often employ thousands of mining rigs that are stacked floor to ceiling in large warehouses, buzzing away day and night while validating transactions on the various blockchains.
Some companies also offer mining pools, in which they combine computational efforts to increase the chances of finding blocks to mine.
Traditional finance is dotted with consulting companies that provide clients with detailed research on anything market-related. In the same vein, companies like Chainalysis have carved out a niche for themselves in the crypto space. These types of companies provide detailed breakdowns of the data collected from the various blockchains, along with insights into the crypto industry. Other research companies base their insights on investment activities in the space.
These companies make it easy for companies to integrate cryptocurrency into their everyday business by acting, in a way, as the Visa or Mastercard of cryptocurrency.
Lenders in crypto are not much different from a traditional bank in that clients essentially loan the lender their crypto and earn interest on the amount. The lender then uses this money to invest in projects or offers loans to other individuals and businesses at a higher interest rate.
The first step in your crypto investment journey should always be backed up by thorough research about what you’re investing in and who you’re investing with. The better an investor’s knowledge of the crypto landscape, the better they are equipped to make sound investment decisions. This is why we’re on a mission to educate investors, especially those new to crypto. Visit the Luno learning portal to learn more about cryptocurrency and investing.